Amending the Articles of Association

Amending Articles of Association for Residents’ Management Companies

What are Articles of Association?

The Articles of Association are the “rules” that govern how a company is run. New companies are often formed with standard Articles of Association for limited companies. The Articles cover constitutional matters and should be applied in conjunction with the provisions of the Companies Act 2006.

Why might the Articles require amending?

The Articles of Association for a trading company assume a company established to generate a profit rather than a company established to act on behalf of the collective interests of the leaseholders of a development in accordance with the provisions of the lease.

Examples of clauses in Articles of Association that may require amendment:

Limitation of membership to dwellingholders. It is important that membership is limited to the persons who are obliged to contribute service charges to the company.

Voting rights should state that each dwellingholder is entitled to one vote for each dwelling. Articles of Association may have been written prior to the recent popularity of “buy-to-let” and limit votes to one per member rather than one per dwelling.

Joint owners – The Articles of Association may state that where a property is jointly owned that only the senior joint member may vote. (The senior joint member often being defined as the first named on the share register) [N.B. It is a legal requirement for all companies to maintain a share register]. The Articles of Association should make proper provision for other joint owners to attend meetings and vote should the senior joint owner not do so for whatever reason.

Restrictions on who may act as a director may or may not be stated in the Articles of Association. It is often the case that only a dwellingholder may be a director. The members may have good reason to introduce or amend such a clause. For example the members may wish to agree that a non-dwellingholder may be appointed subject to being given notice at any time from dwellingholder directors or the members.

Provisions for appointing a new director may be unsatisfactory. The general practice is that a new director may be appointed by the existing directors but should then offer themselves for re-election by members at the next Annual General Meeting (AGM).

Reappointment of Directors Articles of Association should provide for the removal of directors. This is important should they cease to be a dwellingholder. Most Articles state that a director should retire by rotation every three years at an AGM and offer themselves for re-election at the AGM should they wish to continue in office with the support of the majority of members.

Number of Directors Whilst the Companies Act 2006 reduced the minimum number of directors legally required to one, the Articles of Association may have been written earlier and require a higher minimum number of directors and this will continue to apply despite the changes introduced in the Companies Act 2006. Given the difficulty of recruiting directors the members may wish to amend the Articles of Association to reduce the minimum number to one. Although the Companies Act 2006 does not set a maximum number of directors the members may wish to set a maximum number or change the maximum number in the Articles of Association as it may be difficult to conduct business with too many directors.

Must all members be directors? In order to be seen as democratic many residents’ management companies were established with Articles of Association requiring all members to be directors. This approach now conflicts with the provisions of the Small Business, Enterprise and Employment Act 2015 that came into force on 10th October 2015. This states that directors are now required to provide their written consent to the company to act as a director. In addition it may be difficult to conduct business with too many directors

Annual General Meetings It is possible that the Articles of Association do not state that an AGM must be held. (This is common with companies registered before 2006 as the previous companies acts all required companies to hold an AGM and therefore there was no need to incorporate this requirement in the Articles of Association). This changed when Part 13 (sec281 – sec361) of the Companies Act 2006 came into effect on 1 October 2007. The 2006 Companies Act now applies by default and unless the Articles of Association require an AGM there is no longer any requirement to hold one.

The members may therefore wish to amend their company Articles of Association to follow best practice and to ensure that the company is run fairly.

Any changes to the Articles of Association must be in the genuine best interest of the whole company, rather than for a particular section of the membership. While this does not mean that every member must agree to a change to the articles, such change cannot be used by a majority to discriminate against the minority or deprive minority shareholders of their rights.

When a legitimate requirement to update the Articles of Association has been identified, this change can be implemented by either

Amending the wording of one or more clauses in the existing Articles of Association

Adding, removing or substituting clauses from the existing Articles of Association; or

Adopting an entirely new set of Articles of Association to replace the existing Articles of Association.

Unless the company has only a single director and shareholder any change to the Articles of Association will require a special resolution to be passed. This means that it will require the agreement of 75% of shareholders. There are two ways in which a special resolution can be passed:

A written resolution to change the Articles of Association

A written resolution may be easiest where there are only a few shareholders as it avoids the need to call and hold a meeting of all members.

An example of a written resolution is given below – Appendix 1.

A signed copy of this resolution must be sent to Companies House within 15 days of it being signed together with a copy of the new or amended articles.

A special resolution passed at a shareholders’ meeting

A special resolution can be agreed at a general meeting – either a planned AGM or a General Meeting of the members.

In order to pass a special resolution the directors must:

Hold a board meeting and resolve to convene a General Meeting and approve a resolution to send to the members. The notice of the meeting must state why the Articles of Association need to be changed and should summarise the main provisions/changes in consequence of the new Articles of Association. The full text of the new Articles of Association or details of where they may be viewed should be included.

Hold the General Meeting. The special resolution to amend the Articles of Association must be passed by a majority of 75% or more of the members who vote at the meeting either in person or by proxy listing the resolution(s) proposed.

A signed copy of the special resolution should be sent to Companies House within 15 days of the General Meeting.

An example of a resolution passed at a General Meeting is given below – Appendix 2.

Whichever method is chosen, the new Articles of Association are deemed to take effect when the special resolution has been passed.

Appendix 1

THE COMPANIES ACT 2006

WRITTEN RESOLUTION

– of –

_________________ (the “Company”)

Registered office: ____________________________________________

Company Number: _____________

CHANGE OF ARTICLES OF ASSOCIATION

We the undersigned, being all the members of the Company who at the date of this resolution are entitled to attend and vote at General Meetings of the Company, hereby unanimously resolve upon the following resolution and agree that it shall be as valid and effective as if it had been passed as a special resolution at a General Meeting of the Company duly convened and held.

THAT the existing Articles of Association of the company be modified as follows:

Articles x and/to y to be removed and the numbering of the subsequent articles be amended accordingly;

AND/ OR

The new attached articles numbered x and/to y to be implemented

AND/ OR

The wording of article z to be amended to read:

(Insert new wording of article z).

OR THAT the Articles of Association contained in the document attached to this Resolution be and hereby are approved and adopted as the new Articles of Association of the Company (the “New Articles”) in substitution for and to the entire exclusion of the existing Articles of Association.

DATED: _____________________________

SIGNED:

___________________ (Name of 1st member)

___________________ (Name of 2nd member)

etc for all members

Appendix 2

THE COMPANIES ACT 2006

SPECIAL RESOLUTION

– of –

_________________ (the “Company”)

Registered office: ____________________________________________

Company Number: _____________

CHANGE OF ARTICLES OF ASSOCIATION

At a General Meeting of the Company, duly convened and held at [address where meeting held] on [date meeting held], the following resolution was duly passed as a special resolution.

SPECIAL RESOLUTION

THAT the existing Articles of Association of the company be modified as follows:

Articles x and/to y to be removed and the numbering of the subsequent articles be amended accordingly;

AND/ OR

The new attached articles numbered x and/to y to be implemented

AND/ OR

The wording of article z to be amended to read:

(Insert new wording of article z).

OR THAT the Articles of Association contained in the document attached to this Resolution be and hereby are approved and adopted as the new Articles of Association of the Company (the “New Articles”) in substitution for and to the entire exclusion of the existing Articles of Association.